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A Winning Recipe for Picking Dividend Stocks

There are almost as many dividend-stock-picking strategies as there are dividend stocks. You could go for the dividend "achievers," which have boosted dividends for at least 10 consecutive years, or the "aristocrats," which have raised dividends for at least 25 years. You could focus on stocks with the fastest dividend-growth rates, or simply those with today's highest yields.

But to cook up a portfolio full of healthy, sustainable and growing payouts, you need more ingredients. Recent research suggests that mixing a high dividend yield with strong dividend growth and a low "payout ratio" (the percentage of earnings paid out as dividends) is a winning recipe. Pankaj Patel, managing director at investment-research firm Cirrus Research, says a portfolio of stocks combining those three factors has beaten Standard & Poor's 500-stock index by 6 percentage points annually over the long haul.

Generous dividends are a lifeline for seniors drawing income from their portfolios--particularly when the 10-year Treasury yields 2.4% and the S&P 500 yields less than 2%. But dividend growth is slowing and payout ratios are climbing, presenting challenges for...